Addus HomeCare Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The company provides home and community care and home health services through 120 locations in 19 states. Financial amounts below are in millions, except per-share data and where noted.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net service revenue | $69.4 | $69.8 | $204.5 | $201.6 |
| Gross profit | $21.0 | $20.1 | $60.2 | $58.7 |
| Operating income (loss) | $(12.9) | $2.8 | $(8.2) | $8.8 |
| Net income (loss) | $(9.0) | $1.5 | $(6.9) | $4.5 |
| Diluted EPS | $(0.84) | $0.14 | $(0.64) | $0.43 |
| Net cash from operating activities | — | $11.8 | $5.1 |
- Q3 revenue declined 0.7%; nine-month revenue increased 1.4%. Home and community revenue declined 2.0% in Q3 and rose 0.7% year to date; home health revenue rose 5.6% and 4.6%, respectively.
- Consolidated gross margin was 30.3% in Q3 versus 28.8% a year earlier. Excluding the impairment charge, management reported operating margin of 4.5% for Q3 versus 4.0%, and 3.8% for nine months versus 4.3%.
- Home and community segment operating income improved to $6.8 million in Q3 and $18.1 million year to date. Home health reported operating losses of $15.8 million and $14.3 million, respectively, including the impairment.
Balance sheet, debt and liquidity
- At September 30, cash was $1.3 million; accounts receivable, net, $69.9 million; total assets $156.3 million; and stockholders’ equity $81.5 million.
- Total debt was $34.7 million, including $6.3 million current and $28.4 million long-term, down from $45.2 million at December 31, 2010. Revolver borrowings were $26.5 million; reported availability was $18.0 million. The revolver rate was 4.8% at quarter-end.
- Current assets were $88.3 million and current liabilities $46.5 million. Cash increased from $0.8 million at year-end. Operating cash flow of $11.8 million funded investing outflows of $0.8 million and financing outflows of $10.6 million.
- The company reported compliance with credit-facility covenants and said cash from operations plus available credit should meet working-capital needs for at least 12 months. Illinois payment delays remain a potential liquidity pressure.
Material changes and unusual items
- A preliminary impairment assessment resulted in a noncash $16.0 million charge in Q3: $13.1 million of home health goodwill and $2.9 million of home health intangible assets and licenses. Management said it did not affect cash flow, liquidity, borrowing availability or covenants. The charge was preliminary and subject to the October 1 annual impairment test; the final assessment could change it.
- In October 2011, the company received $2.3 million of Illinois prompt-payment interest, to be recognized in Q4. The amount and timing of any additional interest receipts are uncertain.
- Operating cash flow improved year over year, which management attributed primarily to better collections and increased Illinois payments. Illinois receivables were $46.3 million at quarter-end, and the state continued to pay on a delayed basis.
- The Illinois Department on Aging accounted for 42.2% of nine-month revenue; Medicare accounted for 12.6%. Illinois and California together represented 65.9% of nine-month revenue.
Outlook, risks and contingencies
- No company-specific earnings or revenue guidance is provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- CMS finalized home health payment changes for 2012, including a 3.79% episode-rate reduction, with a further 1.32% reduction planned for 2013; the market-basket update was 1.4%. The filing also discusses reimbursement, quality-reporting, face-to-face certification and therapy-payment requirements as risks.
- Other risks include dependence on government payors and state budgets, delayed Illinois reimbursements, receivable collection and billing-conversion issues, Medicare/Medicaid reimbursement changes, and uncertainty around accountable care organizations and other cost-control programs.
- The IPO class action and shareholder derivative action were dismissed with prejudice after settlements; stated settlement amounts were covered by insurance. The Illinois Attorney General’s investigation into the Veterans Deserve program concluded with no further information or action requested. Management said other ordinary-course proceedings were not expected to have a material effect.
- Management reported disclosure controls and procedures were effective as of September 30, 2011, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Results and valuation assumptions in the completed October 1, 2011 goodwill and intangible-asset impairment test.
- Whether home health operating performance improves, particularly given higher administrative and consulting costs and weaker Medicare revenue per completed episode.
- Illinois reimbursement timing, the aging and collectability of receivables, and the timing or amount of any further prompt-payment interest.
- Actual effect of finalized CMS payment reductions and other Medicare and Medicaid policy changes on reimbursement and margins.
- Availability under the borrowing-base formula, covenant headroom, and scheduled debt and earn-out payments.